Question

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information, which one of the following statements is correct?

Year  Project A  Project B

0    -950,000  -125,000

1      330,000    55,000

2      400,000    50,000

3      450,000      50,000

		You should accept project B because it has the higher IRR and reject project A
		You should accept project A because it has the higher NPV and you can not accept both projects
		You should accept both projects if the funds are available to do so since both NPV's are > 0
		You should accept project A because it has the lower NPV and reject project B.

Answer 1

Project A:

NPV = Present value of cash inflows - present value of cash outflows

NPV = -950,000 + 330,000 / (1 + 0.1)¹ + 400,000 / (1 + 0.1)² + 450,000 / (1 + 0.1)³

NPV = -950,000 + 300,000 + 330,578.5124 + 338,091.6604

NPV = $18,670.17

Project B:

NPV = Present value of cash inflows - present value of cash outflows

NPV = -125,000 + 55,000 / (1 + 0.1)¹ + 50,000 / (1 + 0.1)² + 50,000 / (1 + 0.1)³

NPV = -125,000 + 50,000+ 41,322.314 + 37,565.74

NPV = $3,888.05

You should accept both projects if the funds are available to do so since both NPV's are > 0